The streams of revenue that keep the state of Delaware running are by their nature unpredictable – constantly rising or falling with the rhythms of the economy, and prone to being jostled by policies flowing out of the Washington Beltway.

Over the past year, however, some of these income streams went from merely turbulent to downright unnerving.

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First came the sizable (but anticipated) reductions in federal funding that emerged from the COVID 19 pandemic. Then came the news that the “One Big Beautiful Bill Act” (OBBBA) would give U.S. corporations tax breaks that threatened to dent Delaware’s revenue – to the tune of $400 million a year.

In the end, thanks to some frantic legislative scrambling, Delaware managed to blunt OBBBA’s effects. But looking ahead, there are plenty of reasons for caution and concern in the halls of Dover.

For the last three years, spending growth had been outpacing revenue growth in the state. At the beginning of the FY27 budget process, the state was looking at a more than $500 million deficit, thanks to inflation and rising costs. Gov. Matt Meyer’s proposed budget aims to address that deficit through spending cuts, but there is still worry that Delaware is facing some unique funding challenges. 

Federal Dollars Are Down

Delaware benefits from two types of federal funding:

1. Direct-to-Resident benefits like Social Security, Medicare, and veterans’ payments — money paid straight to individuals that never enters the state budget.
2. Federal funds managed by the state, such as Medicaid matching dollars, education grants, and infrastructure support.

It’s the second category that matters for the state’s finances, and those funds have been shrinking — and look likely to continue to do so. Pandemic-era funding that had bolstered Delaware’s operating budget has run out, and federal support within Delaware’s operating budget has dropped from about $1.35 billion in FY2025 to roughly $1.05 billion in FY2026 — a $300 million reduction, or 22%. That lowers the federal share of Delaware’s operating budget from nearly 20 percent to 16 percent.

Looking ahead, more funding cuts seem likely. Under the federal “One Big Beautiful Bill” (OBBBA) passed in mid-2025, the state is bracing for deeper (and possibly permanent) cuts to Medicaid and SNAP (food stamps). In response, the state has created a $21.9 million Federal Contingency Fund to protect state services.

Delaware’s Own Revenue Is Flattening

Even without the federal cuts, Delaware’s own income has slowed after several unusually strong years. The state’s largest funding sources — personal income tax, corporate income tax, and franchise fees — are all under pressure for different reasons.

Personal Income Tax

Delaware’s single largest revenue stream depends on employment levels and wages. Growth has softened as the post-pandemic job market stabilizes and wage gains slow. DEFAC’s most recent forecast projects only modest personal income tax growth for FY2026, compared to double-digit increases during the recovery years of 2021–23.

Franchise Taxes

The corporate franchise tax — paid by every business incorporated in Delaware — has long been a steady moneymaker, bringing in more than $2.8 billion annually. But there has been concern that it could flatten or dip slightly, if corporate formations slow and competition from other states increases. Each large corporation that leaves Delaware and moves to another state can cost Delaware as much as $250,000 a year. 

Yet there have also been signs that Delaware has been successfully holding on to its title as incorporation king against some high-profile challenges. There was worry when Elon Musk urged companies to leave Delaware – calling his campaign “Dexit” – after he was displeased with a Chancery Court ruling. But recent research out of UCLA found that new business incorporations have actually risen by since he launched his Dexit offensive. 

Corporate Income Tax

This revenue source is far more volatile — as shown by a recent budget threat that the state happily avoided. Last year, the federal “One Big Beautiful Bill Act” allowed corporations to begin deducting more business expenses immediately, which means they would be able to report less taxable income to Delaware. In one quarter alone, Delaware’s corporate income tax revenue dropped $132 million, and another $170 million decline had been expected next year.  

The Delaware General Assembly quickly took steps to mitigate the impact by “decoupling” Delaware from the federal rules, ending the 100% bonus depreciation, and requiring the deduction to be spread over several years. As a result, the December 2025 DEFAC forecast restored over $300 million to the revenue outlook, avoiding drastic cuts.

Still room for caution

Despite the narrow escape from these revenue hits, Delaware remains cautious about spending. Gov. Matt Meyer’s budget proposal for fiscal year 2027 aims to keep spending growth below 5% for the first time in years, excluding the Bond Bill and one-time expenditures (the budget grew by more than 7% in the current fiscal year and 9% in FY 2025).

The governor’s office has said it found “creative solutions” to cut the state’s spending on government healthcare, education, and other areas. Meyer also has plans to enhance revenue from business formation fees, and wants to trim Grants-in-Aid and Bond Bill spending – though these budget strategies are still subject to scrutiny by the legislature in the months ahead.

According to the governor, the FY2027 budget reduces Delaware’s “structural deficit” by more than 70 percent compared to FY2026 projections. Whether that will be enough to please legislative opponents remains to be seen, and it seems certain that the long-term challenge of slower growth vs. rising costs will remain a challenge for Delaware.

Fact Box: Key Takeaways

  • Federal Funds (state-managed): Down ~$300M in the current year (FY26) due to the end of pandemic aid, but stable for FY27.
  • Total Budget Outlook: Rebounding – FY26’s budget dipped to $6.5B, but Gov. Meyer’s proposed FY27 budget restores spending to $6.94B.
  • State Revenue Forecast: Stabilized – The passage of HB 255 (tax decoupling) restored over $300M to the forecast, reversing the “fiscal cliff” predicted in October.
  • Corporate Income Tax: A sharp decline was averted by decoupling from federal “bonus depreciation” rules; revenues are now tracking closer to historical averages.
  • Bottom Line: Delaware’s “fiscal cliff” was avoided by legislative action. Federal aid has permanently receded, but state revenues have recovered enough to support a $7.1B spending limit for FY27, allowing for a balanced but cautious budget.

About the Civics 101 Series: Civics 101 is a continuing explanatory series by Delaware LIVE and the Spotlight Delaware content marketing team designed to help readers understand how state government works and how budget decisions affect everyday life in Delaware. To read other stories in the series, visit the Civics 101 home page.